These aren’t the droids you’re looking for…

Did the largest of the large commodities trading houses use Obi Wan Kenobi’s immortal line on the regulators when it came time to try and get a handle on speculation driving up commodity prices? The aim of the regulators in enacting recent position limits was to control excessive speculation. One of the problems with this is that there has been zero evidence to date that speculators are to blame for rising prices, but the other problem perhaps coming to light in a recent piece from Reuters called Commodity traders: The trillion dollar club is that the regulations may not even be targeting the true speculators.

For the small club of companies who trade the food, fuels and metals that keep the world running, the last decade has been sensational. Driven by the rise of Brazil, China, India and other fast-growing economies, the global commodities boom has turbocharged profits at the world’s biggest trading houses.

They form an exclusive group, whose loosely regulated members are often based in such tax havens as Switzerland. Together, they are worth over a trillion dollars in annual revenue and control more than half the world’s freely traded commodities. The top five piled up $629 billion in revenues last year, just below the global top five financial companies and more than the combined sales of leading players in tech or telecoms. Many amass speculative positions worth billions in raw goods, or hoard commodities in warehouses and super-tankers during periods of tight supply.

Hoarding commodities in times of tight supply? These commodity kings lurking in the background and driving up prices may sound like conspiracy theory, but at the end of the day, they are the ones with the ability to move the markets- the ones with the power to shift a market in one direction or another. Consider some of the other nuggets from the Reuters piece:

How big are the biggest trading houses? Put it this way: two of them, Vitol and Trafigura, sold a combined 8.1 million barrels a day of oil last year. That’s equal to the combined oil exports of Saudi Arabia and Venezuela.

Or this: Glencore in 2010 controlled 55 percent of the world’s traded zinc market, and 36 percent of that for copper.

Or this: publicity-shy Vitol’s sales of $195 billion in 2010 were twice those at Apple Inc. As well as the 200 tankers it has at sea, Vitol owns storage tanks on five continents.

Ironically, the regulators so concerned with market manipulation by speculators don’t seem to give them the time of day. Reuters continued:

U.S. and European regulators are cracking down on big banks and hedge funds that speculate in raw goods, but trading firms remain largely untouched. Many are unlisted or family run, and because they trade physical goods are largely impervious to financial regulators.

The article goes on to breakdown exactly how big these houses are and why they matter (the infamous Koch brothers make an appearance further down), but the takeaway here is that the regulations being prescribed to solve excessive speculation in commodities don’t even come close to touching the actual supply and demand roots of the problem. It’s like the government trying to solve high prices in Coffee but ignoring Starbucks, or trying to solve high prices in books, but ignoring Amazon. At the end of the day, the utility of these measures (especially so close to an election year) seems to be of little consequence; as long as the government looks like it’s fixing problems, everyone’s happy.

As for the trading houses, if they can use the Force to make the regulators tell them to go about their business and move along, imagine what they can do to the weak minds of the world as they are selling them their commodities.

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Disclaimer

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication.